It’s been a great year for the retail sector with SPDR S&P Retail ETF (NYSEARCA:XRT), Invesco Dynamic Retail ETF (NYSEARCA:PMR) and VanEck Vectors Retail ETF (NYSEARCA:RTH) returning 18.5%, 12.7% and 12.3%, respectively, against 7.5% returns offered by SPDR S&P 500 ETF (NYSEARCA:SPY).
After gaining 6.1% year over year in June, U.S. retail sales registered a 6.4% annualized rise in July. A solid labor market and higher take-home pay amid tax reductions probably drove Americans’ ability to spend, helping them to tide over the sudden spike in fuel costs.
Against this backdrop, below we highlight a few factors that explain why retail ETFs are up for more gains.
The back-to-school season, the shopping extravaganza between July and September, is at its peak. Americans are estimated to spend $27.6 billion this time, per an article published on CNBC.
Average spending on apparel, school supplies, electronic gadgets and more is likely to touch $510 per household this year. About $292 of that or 57% of the shopping will be done offline, per a survey by Deloitte.
Retail companies with about 64% of total market cap in the S&P 500 have come up with their results in the second-quarter reporting cycle. About 88.9% beat on earnings with bottom line growth being 43% while 72.2% of the companies surpassed on revenues and recorded 14.3% growth on the top line. There has been a sound blended beat ratio of 72.2%, per Earnings Trends issued on Aug 9, 2018.
Ebbing Trade Tensions
President Donald Trump maybe going all-out to keep Americans at the top spot, but his strategy of protectionism is viewed as a negative for consumers. Trade war between the United States and China as well as retaliatory tariffs with the likes of Canada and Mexico will raise product prices and lead those affected retailers to pass on the price hikes to consumers.
But the tempo of trade war appears to be subsiding of late. On Aug 27, the United States and Mexico agreed on a new bilateral trade deal, which will likely rewrite the North American Free Trade Agreement or NAFTA. And U.S.-China trade talks have been put on hold as of now, according to U.S. Treasury Secretary Steven Mnuchin. These developments should favor retail stocks.
U.S. Consumer Confidence Nears 18-Year High
U.S. consumer confidence is hovering around an 18-year high in August. Per the Conference Board, the consumer confidence index rose 5.5 points to 133.4 this month, reflecting the highest reading since October 2000. Consumers’ judgment on both current business and labor market conditions improved in August.
The S&P 500, the Nasdaq and the Russell have been hovering around the record high. A $68-oil, retreating trade tensions and a flurry of strong economic data points pushed the indexes higher. If the ascent is maintained, a wealth effect can be realized. As per Investopedia, “the wealth effect helps to power economies during bull markets. Big gains in people’s portfolios can make them feel more secure about their wealth and their spending”.
Gradual Fed Rate Hike
An improving economy with a strengthening labor market and a moderately rising interest rate environment is great for consumer discretionary stocks. Investors should note that the Fed has enacted two rate hikes so far this year and is widely expected to tighten the policy again in September despite President Donald Trump’s criticism of higher interest rates. High-end retailing should benefit from this scenario.
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